Test Your Knowledge

True or False:A deterministic (formula-based) risk valuation can provide varying estimates of aggregate risk values, from which an analyst can choose depending on the confidence level desired by decisionmakers.

Questions?

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Lesson 4 - Risk Allocation

Risk Transfer by Procurement Type

Procurement Type

Design Risk

Construction Risk

Financial Risk

O&M Risk

Traffic & Revenue Risk

Design-Build (DB)

X

X

Design-Build-Finance (DBF)

X

X

X

Design-Build-Finance-Operate-Maintain (DBFOM) w/Availability Payment

X

X

X

X

DBFOM w/Toll Concession

X

X

X

X

X

Typical Risk Allocation

Risk

Design-Bid-Build

Availability Payment P3

Toll Concession P3

Design Errors

Public

Contractor

Contractor

Change in Scope

Public

Public

Public

Delay in permits

Public

Shared

Shared

Delay in right-of-way acquisition

Public

Public

Public

Construction cost overruns

Contractor

Contractor

Contractor

Construction risks

Contractor

Contractor

Contractor

Archeological findings

Public

Public

Public

Delay in relocation of cables and pipes

Public

Contractor

Contractor

Unknown ground conditions

Public

Contractor

Contractor

Hazmat

Public

Shared

Shared

Security

Public

Contractor

Contractor

Major maintenance cost overruns

Public

Contractor

Contractor

Snow and ice removal cost overruns

Public

Contractor

Contractor

Regular maintenance

Public

Contractor

Contractor

Traffic information systems

Public

Public

Public

Incident management

Public

Contractor

Contractor

Toll revenue risk

Public

Public

Contractor

Financing risks

Public

Contractor

Contractor

Force majeure

Public

Shared

Shared

Risk Transfer Principles

P3s do not transfer all project risk

Risk is allocated to party most capable of managing the risk

"Managing risk" may mean insuring that risk

Risk transfer will increase the bid price of the private sector

Transferring risks can incentivize performance

A risk may be shared if neither party is more capable of managing it

Risks have a value (or cost) that varies over time

Risk Allocation Steps

Step 1: "Likelihood"

First, risk should be allocated to the party best able to control the likelihood of the risk occurring.

Step 2: "Impact"

Second, risk should be allocated to the party best able to control the impact of the risk on project outcomes.

Step 3: "Lowest Cost"

Third, risk should be allocated to the party best able to absorb the risk at lowest cost if the likelihood and impact cannot be controlled

Financial Impact of Risk Transfer

Port of Miami Tunnel
Risk Allocation Example

Risk Category

FDOT

Private

Shared

Political

X

Financial

X

Traffic and Revenue

X

Right of Way

X

Planning and Permitting

X

Utilities

X

Procurement

X

Construction

X

Operations and Maintenance

X

Hand-Back

X

Force Majeure

X

Change in Law

X

Geotechnical

X

Test Your Knowledge

True or False:The goal in risk allocation is to transfer all risks to the private partner in a P3.

Questions?

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Lesson 5 - Risk and Value for Money Analysis

What is Value for Money?

Value for Money (VfM)

The optimum combination of life cycle costs and quality of a good or service to meet the user's requirements

Expressed as cost difference (dollars or %) between conventional and P3 procurement

VfM Analysis

Quantitative analysis to compare the financial impacts of procurement alternatives for a project